What Happens if You Don’t File Your Taxes?

Ever wonder what happens if you don’t file your taxes?

Every so often, you hear stories about folks who just decided they weren’t going to do it. Then you read about how they are discovered, owe a ton in back taxes, and are never heard from again because the media doesn’t find the story interesting anymore and I don’t care enough to follow up.

But what if you’re not like one of those people?

Perhaps you fear a big tax bill due to a prosperous year. Or, you can think of a hundred better ways to spend your cash than mailing a check to the IRS or your local state tax agency. It’s common knowledge that you can be audited if you lie on your tax return. For example, if you don’t report all of your income or claim inappropriate deductions.

But what happens when you don’t pay your taxes? Will the IRS realize one measly missing tax return of the 195 million returns electronically filed each year?

The answer is yes.

And while it’s possible (but nearly impossible) to sneak below the radar, there can be stiff financial and legal penalties.

Table of Contents
  1. Legitimate Reasons You Don’t Need to File Taxes
  2. IRS Statute of Limitations
    1. Collection Deadline
    2. Audit Deadline
  3. Severe Consequences of Not Paying Taxes
    1. Tax Filing Penalty with Interest
    2. Wage Garnishment
    3. Tax Liens
    4. Tax Evasion Charges
    5. Substitute Tax Return
    6. No Tax Refund
    7. No Social Security or Disability Credits
    8. Cannot Qualify for Loans
  4. How to Pay Back Taxes
    1. Lump-Sum
    2. Installment Plans
    3. Hire a Tax Attorney
  5. Summary

Legitimate Reasons You Don’t Need to File Taxes

Just because you earn an income doesn’t necessarily mean you must file a tax return. Here are some of the instances when you can legally not file a return:

  • Only earn non-taxable Social Security benefits
  • Earn less than the standard deduction and don’t owe a tax liability
  • Earn less than $400 in self-employment income
  • Don’t receive advance payments for the healthcare marketplace Premium Tax Credits (Form 1095-A)

So, if you earn a small income, withhold sufficient payroll taxes, and don’t want to claim additional tax credits or receive a tax refund, you can skip filing your taxes worry-free. However, it might be worth your time, so you can get the extra money that you legally qualify for with the tax code. Some examples include the Earned Income Credit and Child Tax Credit. You may also appreciate filing for peace of mind.

IRS Statute of Limitations

The following two crucial IRS deadlines can affect you if you don’t pay your taxes on time.

Collection Deadline

The IRS currently has a 10-year statute of limitations for collecting unpaid taxes. While this countdown usually starts on April 15, when you file your taxes before the filing deadline. However, the timer may not begin until years later if you delay filing your return. Significant events like declaring personal bankruptcy or moving out of the country may suspend the collection period but not cancel the affected months.

Audit Deadline

The IRS has to initiate a tax audit within three years after filing a return – the same window to file a return and claim a refund. You can also file an amended return during this time to fix errors. However, you might pay penalties and interest if you originally underpay. There can be exceptions to these deadlines like most legal matters, and a tax lawyer can help you navigate the process.

Severe Consequences of Not Paying Taxes

If you don’t submit a return, underpay, or have accuracy errors, there are various potential negative consequences. The severity primarily depends on how much you owe and when you file your return. Here are some of the possible outcomes that can occur.

Tax Filing Penalty with Interest

Here are two of the most common income tax penalties:

  • Failure to File: You don’t file before the tax filing deadline. The deadline is usually April 15 but is April 18, 2022 for your 2021 taxes.
  • Failure to Pay: You don’t pay your total income tax due before the federal tax deadline.

Neither penalty applies if you’re due a refund. It’s possible to avoid the failure-to-file penalty by requesting a tax extension. However, you must still pay the total due by the annual filing deadline. Even if you don’t have all of your tax documents (i.e., Schedule K-1 documents) by the federal deadline (April 15 in most years), your interest penalties begin on the federal filing deadline, not when you finally file your return.

Your penalty rate is usually a percentage when you don’t file or underpay. However, if you receive an IRS notice, you may have the option of paying the fixed amount in the notice to avoid future charges. In addition to the penalty rate, you owe interest on the amount due. The IRS interest rates update quarterly and compound daily. For example, the interest rate for individuals is the federal short-term rate plus 3% (approximately 3.59% in February 2022).

Failure to File Penalty Amount

Your monthly penalty is 5% of your unpaid tax liability and won’t exceed 25% of your total amount due. The combined penalty percentage is 5% if you also have a failure-to-pay penalty. The minimum penalty is $435 or 100% of the tax required (whichever is less) if you file at least 60 days late. Learn more about the IRS Failure to File Penalty here.

Failure to Pay Penalty

The Failure to Pay Penalty is 0.5% of your unpaid balance each month up to 25% of your total amount due. Your combined monthly penalty rate won’t exceed 5% if you’re also paying a failure-to-file penalty (this fee reduces to 4.5%). Your penalty rate can be different if you file in time but don’t pay in the correct amount:

  • Enroll in a payment plan: Your monthly rate drops to 0.25%
  • Don’t pay your income tax due within 10 days after receiving a notice with the IRS intent to levy: The monthly rate is 1%

Learn more about the IRS Failure to Pay penalty here.

Wage Garnishment

You might receive an IRS levy garnishing your wages to repay overdue taxes. Usually, you won’t receive a levy until meeting these four conditions:

  1. The IRS assesses your tax and sends you a Notice and Demand for Payment (i.e., a tax bill)
  2. You neglect or refuse to pay a tax notice
  3. The IRS sends you a Final Notice of Intent to Levy and Notice of Your Right to a Hearing (levy notice) at least 30 days before the levy goes into effect.
  4. IRS sends you an advance notice that third parties may start collecting your tax liability.

As you can see, there is a gradual process, and wage garnishment happens if you don’t pay the initial penalties or negotiate a payment plan. When the IRS implements a levy, you will receive Form 1494 listing your garnishment amount. The withholding can come from your paychecks or bank account.

Tax Liens

The IRS may also place a lien on your physical property, such as real estate or vehicles. A lien is different from a levy and doesn’t mean the tax agency will seize your property to satisfy your tax debt although it’s a possibility. However, a federal tax lien can have these adverse effects:

  • It can appear on your credit report.
  • May not be able to sell your physical property until satisfying the lien requirements
  • Can attach to your business property

This lien can still apply even after you file for bankruptcy. Following up on the IRS correspondence letters can help you avoid this action if you need help paying your taxes.

Tax Evasion Charges

If you still don’t file your taxes or render unto Caesar your amount due, the IRS may pursue criminal penalties. 20th-century gangster Al Capone committed many heinous crimes during his day. But, interestingly, tax evasion (and bootlegging during the Prohibition Era) put him in federal prison.

Capone owed $215,000 in back taxes plus interest at his sentencing in 1931. That’s approximately $3.9 million in today’s dollars (February 2022). While most delinquent filers won’t go to jail or encounter criminal prosecution, it’s important to remember this possibility still exists today.

Substitute Tax Return

The IRS may take it upon themselves to file a substitute tax return on your behalf using the tax forms provided by your employer, banks, and investment brokerages. You will receive a Notice of Deficiency (CP3219N) when generates a substitute return to estimate your tax bill. Then, you have 90 days (150 days if you live out of the country) from the notice date to file a petition with the U.S. Tax Court to challenge the proposed tax. While this step can potentially keep you out of tax trouble, you will most likely miss out on valuable tax deductions and tax credits.

No Tax Refund

You cannot claim a tax refund that’s legally yours if you don’t file a return within three years of the filing deadline. For example, if you qualify for a refund during the tax year 2021 with a standard filing deadline of April 18, 2022, you have until April 15, 2025, to file your return. Missing the deadline means you forfeit your refund amount.

No Social Security or Disability Credits

Your future Social Security and disability insurance benefits can be smaller as you won’t receive credit for the years you don’t file. This consequence primarily affects the self-employed as W-2 employees have payroll taxes withheld from each paycheck.

Cannot Qualify for Loans

An indirect consequence is not qualifying for loans when the lender requires a copy of your recent tax returns. This requirement is usually for new home loans and mortgage refinancing.

How to Pay Back Taxes

It’s your responsibility to pay any unpaid taxes to the IRS to avoid unnecessary penalties and interest. There are several ways to settle your tax bill.

Lump-Sum

If you owe a small amount and have the spare cash, consider making a lump-sum payment. This is the quickest way to get back into good graces with the IRS and avoid future financial charges.

Installment Plans

Sometimes, you can’t afford to pay your tax bill all at once. As embarrassing as a surprise tax bill can be, filing your return on time and getting on a monthly payment plan keeps you in good standing and minimizes your penalties and interest. You may also be able to contact the IRS to set up a repayment plan, file an appeal, and demonstrate financial hardship.

Hire a Tax Attorney

Some tax situations are too complex to navigate alone. Seeking counsel from a tax attorney can be the best option if you need to go to tax court or sue a tax agency.

Summary

As you can see, not paying your taxes can have several financial and legal ramifications. Therefore, do everything you can to promptly file your taxes and pay your tax liability. Even better, hopefully, you’re due a refund and can avoid any potential tax penalties. As uncomfortable as it can be to pay fines and interest, addressing an adverse tax situation sooner instead of later can give you more time and money to focus on other financial priorities down the road.

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About Josh Patoka

After graduating in $50k with student loans in May 2008 from Virginia Military Institute with a B.A. International Studies and Political Science with a minor in Spanish (he studied abroad in Sevilla, Spain for 3 months), Josh decided to sell his soul for seven years by working in the transportation industry to get out of debt ASAP and focus on doing something else with a better work-life balance.

He is a father of three and has been writing about (almost) everything personal finance since 2015. You can also find him at his own blog Money Buffalo where he shares his personal experience of becoming debt-free (twice) and taking a 50%+ pay cut when he changed careers.

Today, Josh relishes the flexibility of being self-employed and debt-free and encourages others to pursue their dreams. Josh enjoys spending his free time reading books and spending time with his wife and three children.

Opinions expressed here are the author's alone, not those of any bank or financial institution. This content has not been reviewed, approved or otherwise endorsed by any of these entities.

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